Saturday, August 30, 2014

My Article Titled "Hong Kong's Land Policy: A Recipe for Social Trouble" (Part 2 of 3)


Gas Plants and Farms

Since the 1960s, leading developers have shown a knack for amassing cheap agricultural land in the New Territories. In the 1970s and 1980s, they were astute enough to acquire public utilities/services companies with large land banks (land on which gas plants, electricity plants and bus depots, for example, are accommodated). By using land designation procedures, such land can be re-designated for residential or commercial use at the discretion of the landowner upon payment of a negotiated premium to the government. This payment in theory represents the difference between the value of its existing use and the value of its modified use.

The operative word here is “negotiated”, as compared to open bidding at land auctions or tenders. By exercising careful control over the timing of initiating the procedure (say, whenever new infrastructure and public facilities become available in the vicinity, and when the property market is in a down cycle), these developers often manage to negotiate a relatively favorable price for modifying an old lease. This probably explains their ability to achieve lower average land costs than can other developers who do not own such land banks and can only acquire land via competitive bidding at public auctions or tenders. Thus whenever the government places a curb on land auctions, it affects the smaller developers adversely but not the land-rich ones. This makes even less competitive a land market already difficult to enter due to extremely high costs in the best of times.

At present, the government is the largest landowner but a few leading developers dominate the private market. As of 2009, Sun Hung Kai Properties, Hong Kong’s largest developer, owned a land bank comprising 41.9 million square feet of developable floor area and 24 million square feet (in site area) of agricultural land. In the same year, Henderson Land held 19.8 million square feet of developable floor area and 32.8 million square feet (in site area) of agricultural land. According to the 2009 annual report of Cheung Kong (Holdings), it had a land bank able to meet its development needs for five or six years.

In the last three years, lease modification premiums have brought in a significant portion of total land transaction revenue (i.e. revenue put in the Capital Works Reserve Fund – for details, please see below): 28% in fiscal 2007/2008, 53% in 2008/2009 and 59% in 2009/2010. This indicates that a few big landholders have taken advantage of the system at a time of few land auctions.

A land value tax or levy set at a high enough rate (in addition to the existing ground rent equal to 3% of ratable value) could significantly increase the carrying cost for landowners. It might well discourage further hoarding and encourage more sales. Such a tax or levy would not be unfair, as the land’s enhanced value is created by community needs (e.g. when new infrastructure is put in place or when a new town is developed) and not by efforts of the landowners. The tax would be levied annually, based on valuation according to its planned use according to current zoning plans. Since it would be collected before any lease modification takes place, it should not, arguably, be passed on to home purchasers.

Because the high land price policy stimulates land hoarding by major developers, it has been made even more egregious by the preferred economic model of two HKSAR governments that have been determined to promote infrastructure development. Both saw such construction as an important engine of economic growth and job creation. But this approach has created a vicious cycle (though for government and the property cartel, it may be virtuous) of investing money collected from land sales in building projects that boost land values. This lines the pockets of land-rich cartels and spurs them to hoard yet more land and bid up land prices at auctions.

On April 1, 1982, a Capital Works Reserve Fund (“CWRF”) was established for the purpose of financing public works projects. Since then, revenue from land transactions has been earmarked for that purpose. From 1970 to 1991, such revenue financed an average 55% of annual infrastructure investment[4].

Infrastructure as Economic Cure-all

In Chief Executive Tung Chee Hwa’s 2001 Policy Address, he boasted that the government would invest HK$400 billion (US$51.6 billion) in 1,600 infrastructure projects over the following nine years. In Donald Tsang’s 2007 Policy Address, he said, “Infrastructure development can bring about huge economic benefits. Both employment opportunities and wages will increase during the construction stage, and, upon completion, the infrastructure projects will boost economic activities and improve the living environment.” Since then, public works spending for fiscal 2008/2009 increased by 18% from the previous year, and for 2009/2010 shot up another 37%, with a projected 54% increase in 2010/2011.

For 2008/2009, CWRF funds were able to fund 83% of the year’s public works expenditure. For 2009/2010, the CWRF balance was more than enough to finance the full year’s public works program and in 2010/2011 it is expected to finance 80% of the year’s planned spending.

Typically, a public works program includes road improvements, drainage, new highways, waterworks, port and airport development, plus new towns and urban area development.

Critics have often called some of this wasteful, devoted to projects that plainly are not necessary or have questionable economic value. For example, Christine Loh and Carine Lai of the research organization Civic Exchange made this trenchant remark in their book[5]: “The result of restricting land-related income for capital works in effect creates pressure to spend on physical hardware construction. With a strong lobby inside the civil service for public works, such as reclamation, highway building and other types of engineering projects, and an influential lobby outside the bureaucracy through a number of the functional constituencies, the political system favors heavy spending on bricks and mortar.”

That shows the both HKSAR governments so far have embraced an infrastructure-led economic model, tightly intertwined with their high land price policy—a policy that is in fact a legacy of colonial times.

Under colonial rule, low profits tax rates were deemed beneficial to British corporations and hence to governance. To make up any revenue shortfalls, it was decided to collect sale proceeds from selling land lease rights to the highest bidders through auctions while also exacting premiums from lease modifications and lease renewals. Unintentionally, though, the policy induced savvy developers to begin hoarding land and manipulating housing supplies to maximize their profits. Not only did this give those few developers an overbearing position in the economy, it also helped cause chronically unruly property speculation, at the expense of those with genuine housing needs.

Since the 1997 sovereignty change, both HKSAR governments have followed almost to the letter the previous fiscal model. By adopting this model[1], the HKSAR governments inherited the high land price policy from the colonial administrators—but not their buffer tactics such as providing adequate public rental and subsidized housing and imposing certain rent controls. Those remedies were halted in 1998.

4  Yu-hung Hong, Land Lines Article Volume 11, No. 2, March 1999, Lincoln Institute of Land Policy.

5  Christine Loh and Carine Lai, Civic Exchange, 2007, Reflections of Leadership: Tung Chee Hwa and Donald Tsang 1997-2007.

No comments: